S&P penalty may reach $5 billion from U.S. suit over ratings

The U.S. is seeking as much as $5 billion in penalties from McGraw-Hill Cos. and its Standard & Poor’s unit as punishment for inflated credit ratings that Attorney General Eric Holder said were central to the worst financial crisis since the Great Depression.

Holder, flanked today in Washington by state attorneys general who also filed suit against the New York-based company, said S&P made false representations, concealed facts and manipulated ratings criteria and credit models for profit.

“This alleged conduct is egregious -- and goes to the very heart of the recent financial crisis,” Holder said.

S&P rated more than $2.8 trillion of residential mortgage- backed securities and about $1.2 trillion of collateralized-debt obligations from September 2004 through October 2007, according to the complaint. S&P downplayed the risks on portions of the securities to gain more business from the investment banks that issued them, the U.S. said.

The collapse in value of securities that packaged home loans from the riskiest borrowers led to a credit seizure starting in 2007 that sent the world’s largest economy into its longest recession since 1933, as defaults soared and home values plummeted.

Fraud Alleged

The Justice Department complaint, filed yesterday in Los Angeles, accuses McGraw-Hill and S&P of three types of fraud in the first federal case against a ratings company for grades related to the credit crisis. Lisa Madigan, the Illinois Attorney General, said 15 states also have sued the company.

U.S. penalties could amount to more than $5 billion under the law, based on the losses suffered by federally insured financial institutions, according to U.S. Associate Attorney General Tony West. The department considered that number “fairly conservative,” he said.

McGraw-Hill, which had net income of $867 million in the past four quarters, denied wrongdoing.

“Claims that we deliberately kept ratings high when we knew they should be lower are simply not true. We will vigorously defend S&P against these unwarranted claims,” said Catherine Mathis, a company spokeswoman, in an e-mailed statement.

“The fact is that S&P’s ratings were based on the same subprime mortgage data available to the rest of the market -- including U.S. government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained,” she said.